BGBC Partners Tax Update: Summary of Personal Income Tax Credits
Like all taxpayers, grocers are always looking for ways to reduce their income tax. Credits are one of the best ways to do that as they reduce your tax liability dollar for dollar. There are several federal credits you can take advantage of to reduce your income tax liability.
Credits fall into two categories: refundable and nonrefundable. A refundable credit functions just like it sounds. If the credit is greater than the tax liability, this will result in a refund. A nonrefundable credit can reduce the tax liability to zero, but cannot be refunded if the credit amount exceeds the tax liability. This article will discuss both types of credits.
Before we get started, it is important to distinguish between a credit and a deduction. A credit gives you a dollar for dollar offset against your tax liability whereas a deduction gives you a percentage benefit against your tax liability.
Credits that qualify as refundable credits are listed under the “payments” section of Form 1040. Some of these credits include:
1. Earned income credit—this credit provides relief for low-income working individuals. The taxpayer must have earned income and have adjusted gross income that falls within certain limits.
2. American Opportunity Credit—a credit for tuition, required enrollment fees, and course material for the first four years of post-secondary education for up to $2,500 per eligible student per year. Forty percent of this credit is refundable. Adjusted gross income must be under $90,000 for single filers or $180,000 for joint filers. This credit cannot be claimed for more than four tax years for the same eligible student.
3. Health coverage tax credit—this credit pays 72.5% of qualified health insurance premiums for a taxpayer who is an eligible trade adjustment assistance (TAA) recipient, alternative (ATAA) recipient, or reemployment (RTAA) recipient.
Credits that qualify as nonrefundable credits are listed under the “tax and credits” section of Form 1040. Nonrefundable credits include:
1. Child and dependent care credit—a credit for the costs of care for a qualifying child or dependent while the taxpayer works or looks for work. The amount of expenses used to calculate the credit is up to $3,000 for one qualifying child and up to $6,000 for two or more. The amount of the credit will be between 20 and 35 percent of the allowable expenses based on adjusted gross income.
2. Lifetime learning education credit—a credit for qualified tuition and required enrollment fees up to $2,000 per year for a taxpayer, spouse, or dependent. This credit cannot be claimed if the American Opportunity Credit was claimed for that student.
3. Foreign tax credit—allows taxpayers to avoid double taxation for income taxes paid to a foreign country or U.S. possession.
4. Child tax credit—allows for a credit of up to $1,000 per qualifying child.
5. Adoption credit—a credit for qualified adoption expenses paid to adopt an eligible child. The credit is reduced for those with adjusted gross income between $201,010 and $241,010 and is unavailable for those with adjusted gross income above $241,010.
This article touches on just a few of the many credits that exist for reducing personal income tax liability. Many of these credits have extensive eligibility requirements and various limitations, so it is important to consult a qualified CPA to assist you. As I’m sure you’ll agree, any opportunity to lower your personal tax bill is welcome indeed, and credits are a great way to do just that.
BGBC Partners, LLP is a full service certified public accounting and business consulting practice.
For more information, contact Brad Bell, CPA or Steve Reed, CPA/ABV/CFF at BGBC Partners, LLP (317-633-4700).
